This piece first published February 25, 2016, Debtwire Municipals
The State of New Jersey has many solutions available for Atlantic City’s financial problems, including a short-term state loan or a state backstop to new debt, according to a memo from the Office of Legislative Services (OLS) seen by Debtwire Municipals.
The memo, dated 19 February, said it is in the state’s interest to “reassure municipal bondholders that principal and interest will be paid so as not to spook the statewide municipal bond market and interest rates.” Further, there are already many tools in place to help stabilize the city’s finances, but existing supervision efforts will be insufficient without increased long-term financial aid to the city and school district, according to the memo.
The state can issue emergency loans to municipalities at low or zero interest for up to 180 days, though extensions are permitted, according to OLS. This option was already exercised in 2014, when the state loaned Atlantic City USD 40m in 2014 at 0.75%.
Backing municipal debt is another option. The state can pledge aid for debt service payments to give new issuances the state’s credit rating and a lower interest rate. Atlantic City issued debt secured by the New Jersey Qualified Bond Act in 2015.
The memo outlines state powers and consequences if legislation introduced by Senate President Steve Sweeney (D) does not become law. The legislation provides for additional state intervention and aid to Atlantic City.
The city is already under state supervision and has been since 2010, giving the state power over the city’s finances and personnel decisions, and the state therefore has “sufficient authority over the city’s finances to prevent a financial catastrophe,” according to the memo.
The concern is when Atlantic City runs out of cash. The consequences extend to its employees and Atlantic County and Atlantic City Board of Education, which receive tax payments from the city. Typically, a municipality would issue tax anticipation notes if it did not have funds on hand to make payments, but Atlantic City is unable to borrow to make payments as needed given its low credit ratings. Moody’s Investors Service rates Atlantic City Caa1/negative and Standard & Poor’s rates the city at CCC-/negative.
It’s expected the city runs out of money 1 April, but it could be even sooner with the city’s largest taxpayer, the Borgata Casino Hotel, skipping first-quarter taxes to offset money owed for tax appeals, as reported.
The state’s Local Finance Board (LFB) already has much authority in its supervisory function. It can authorize or direct a municipality to liquidate or refinance debt, it can approve and adopt a liquidation plan, require special disclosure and hearings from the local finance officer, make – but not break – collective bargaining agreements and require the appointment of a fiscal control officer as a condition of state aid.
LFB can also instruct the director of local government services to act as a controller of the city’s budget and finances.
Finally, LFB can approve a municipality’s resolution to purchase and retire outstanding bonds, notes or obligations, using unappropriated funds.
Nuclear option: bankruptcy
Filing for bankruptcy may not save Atlantic City from refunds owed to casinos for property tax appeals, according to OLS. It’s uncertain how a judge would view that debt, including more than USD 150m owed to the Borgata for tax appeals dating back to 2009.
“If the Borgata’s tax court judgment is treated as general unsecured debt, then it could be subject to the same provisions as are applicable to other unsecured [creditors],” according to the memo. “Since [state law] permits a taxpayer to apply any refund due after a tax appeal as a credit against future taxes, if Borgata elects to proceed under this statute … then the property tax refund may be considered a property tax prepayment…rather than unsecured pre-bankruptcy petition debt owed by the city.”
Therefore, tax appeals may not be dischargeable in bankruptcy court, according to OLS. As a result, the Borgata could claim a credit for quarterly property tax liabilities, as it did for its first quarter 2016 taxes. Given the substantial amount owed to the casino, it would be many years before it exhausts that credit.
Borgata is the city’s largest taxpayer, making up 20% of the city’s tax base, according to court documents.
A USD 2.1m tranche of 5% Series 2013 general obligation bonds due 2028 last traded in odd lots at 72 to yield 8.726%.